It’s been a busy time for the buy now, pay later segment over the past few days, including an announcement from Discover that it is investing $ 30 million in Sezzle and reports that Apple is looking to jump into the fray with its own installment program for Apple. Pay with Goldman Sachs.
Of course, Apple and Discover are just the latest entrants into the fastest growing form of credit in the consumer loan segment.
It’s no surprise that where consumer interest circulates, regulatory attention is sure to follow. That much, a recent blog post from the Consumer Financial Protection Bureau suggests that he has not only taken note of the growing phenomenon – but that he is perhaps a little less enthusiastic about its rapid expansion and widespread availability than many in the financial and retail industry who have it. argue.
In an early July blog post, the CFPB gave an overview of options to buy now, pay later, including that amounts can range from $ 100 to a few thousand, use different underwriting and risk models that don’t require a rigorous credit check, can be approved in seconds, and for smaller purchases typically three to four fixed monthly payments.
What could be wrong with that?
However, the CFPB also offered this warning.
“BNPL may seem simple and practical; However, there are a few things that you should consider before selecting this option to make a purchase.
As for what consumers should consider, most of the advice CFPB offers is general advice one gives for any credit product: don’t buy things you can’t really afford; late fees can become costly, especially if they are overdrawn on your bank account; different programs have different rules; and some lenders report to the credit bureaus, some don’t.
The big caveat on offer is that BNPL products may look like a credit card, but they are not in terms of consumer protection.
“You can use BNPL to make a purchase and pay for it later over time. However, BNPL loans currently lack the consumer protections that apply to credit cards. For example, they say, “BNPL companies do not offer the same protection against litigation as credit cards if the item you are purchasing is faulty or a scam.”
Does the CFPB still get it
While it’s never a bad advice to tell consumers to know what they’re getting into before they buy it, it seems possible to question how well CPB really understands BNPL or the consumers who use it. For example, the PYMNTS BNPL tracker demonstrates that consumers actually have a pretty astute understanding of the product – and use it because they understand it and are looking to avoid a hard credit draw. They are well aware that this is not a typical revolving credit product.
In fact, Afterpay’s US CEO Nick Molinar told Karen Webster in a recent conversation that the things the CFPB warns against are, in fact, the things that attract young consumers to the product.
The fact that regulators often misunderstand the product and its appeal is in itself a problem, Executive Vice President of Public Affairs for Afterpay Damien kassabgi Karen Webster said last year after the company’s confrontation with California regulators. Afterpay has no objection to regulatory oversight or compliance with regulations. In fact, he hopes to be a partner with regulators in the United States and around the world.
However, Kassabgi said regulating their product as a credit product seemed inadequate to them. The Afterpay model does not charge interest on the four equally divided monthly payments, which is considered the quintessential definition of a credit product.
Afterpay isn’t the only player in the BNPL space to have expressed concerns about the arrival of regulators and disruption of a market, as Klarna had similar concerns earlier this year when she noted that regulators around the world “do not currently have the internal processes and infrastructure for us. to share data about our products buy now, pay later.
At this point, it seems almost certain that these processes and infrastructure will be built given its popularity with consumers and retailers and its expansion into segments beyond the apparel and beauty industries where startups have. first planted their BNPL flags.
Because, as Sezzle CEO Charlie Youakim told Karen Webster in a recent conversation – the real danger to BNPL clients is not a new form of funding – is the degree to which they are excluded from the credit markets because of past errors. or light credit records. Over 50% of Sezzle consumers have FICO scores below 600 or no score, which means their payment options are typically limited to their cash reserves or making no purchases. Youakim told Webster that BNPL is, at its core, a more reliable and transparent offering for the customer and that he increasingly researches and is instrumental in his purchasing decisions.
“And so I think that’s what makes it a must-have for traders. And the benefit is because consumers like this form of credit because it opens up a market that was previously closed to them.